New FHA Reverse Mortgage Product May Offset Need for $250 Million from Congress

Facing the potential of another principal limit reduction for the Federal Housing Administration’s reverse mortgage program, the US Department of Housing and Urban Development (HUD) is working on a solution to reduce (possibly eliminate) the need for the $250 million appropriation requested in the Office of Management Budget for FY 2011.

At the National Reverse Mortgage Lenders Association’s Washington Policy conference last week, Colin Cushman, Director of Portfolio Analysis at HUD detailed a new two reverse mortgage product approach he hopes could be adopted by October 1, 2010.

The new solution engineered by HUD would provide borrowers with two reverse mortgage product options. The first is a needs based HECM product which includes a 2 percent upfront mortgage insurance premium (MIP), 1.25 percent annual MIP, and is close to the same principal limit factors available today.

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FHA is also developing the “HECM Lite”, a new product meant to compete with a home equity line of credit. Created for borrowers who are looking for less money, the HECM Lite has no upfront MIP, a 1.25 percent annual MIP, and lower principal limit factors. Designed to be a pay as you go product, Cushman said it would help lower the risk to the FHA insurance fund and offer borrowers an additional option not currently available.

FHA is working with the Office of Management and Budget to evaluate the two product solution which Cushman believes would offset the need for the $250 million appropriation. However, if rolling out the new changes isn’t possible by October 1st, “a bridge appropriation, heightened premiums, and or reduced principal limit factors may be required to operate the HECM program,” he said.

During the presentation, Cushman said HUD understands another deep cut to principal limits for FY 2011 would greatly impact the number of seniors who have access to the program. He made it clear to attendees that HUD does not want to see it happen.

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  • The product seems ideal in specific situations. From a subjective evaluation, it does not seem that many who are getting traditional HECM products would prefer HECM Lite. If that evaluation is correct, any significant HECM Lite origination activity could not help but eventually raise endorsement volume.

    As a California originator having a fiduciary responsibility to the borrower, HECM Lite would be a great product to have on board. As to the benefits to FHA, they are enormous. It would mean a lower positive credit subsidy and would also most likely provide additional net MIP to offset any losses incurred from traditional HECM products.

    As to how this new product may reduce the subsidy required for the fiscal year ending September 30, 2011, there are many unanswered questions and issues. The first seems to be just getting over the hurdle that OMB will agree to adjust the subsidy for the HECM Lite. Second is having CBO agree to the results of a revised calculation. Next is if the release of the HECM Lite is not expected until after October 1, 2010, will Congress find the reduction too speculative? Then there is the question of the willingness of Congress to fund either a smaller subsidy if the product cannot be ready before October 1, 2010 but seems highly likely before October 1, 2011, or will it simply require an increase in the reduction to PLFs which can be lowered when HECM Lite comes on line. These issues just skim the surface.

    While all of us would prefer that Congress simply subsidize the HECM program as requested (and we all need to be working for that goal), we genuinely appreciate the efforts of FHA (and Mr. Cushman in particular) in pushing the HECM Lite product forward in the hope of reducing the size of HECM subsidy or eliminating it altogether. To all those involved at FHA, thank you for all of your efforts.

  • The product seems ideal in specific situations. From a subjective evaluation, it does not seem that many who are getting traditional HECM products would prefer HECM Lite. If that evaluation is correct, any significant HECM Lite origination activity could not help but eventually raise endorsement volume.

    As a California originator having a fiduciary responsibility to the borrower, HECM Lite would be a great product to have on board. As to the benefits to FHA, they are enormous. It would mean a lower positive credit subsidy and would also most likely provide additional net MIP to offset any losses incurred from traditional HECM products.

    There are many unanswered questions and issues. The first seems to be just getting over the hurdle that OMB will agree to adjust the budget for the fiscal year ending September 30, 2011, for HECM Lite. Second is having CBO agree to the calculation of whatever the negative credit subsidy turns out to be. Next is when will all of the approvals be in place for a release date that is acceptable to Congress? Then there is the question of the willingness of Congress to fund either a smaller subsidy if the product cannot be ready before October 1, 2010 but seems highly likely before October 1, 2011, or will it simply require an increase in the reduction to PLFs which can be lowered when HECM Lite comes on line. These issues just skim the surface.

    While all of us would prefer that Congress simply subsidize the HECM program as requested (and need to be working for that goal), we genuinely appreciate the efforts of FHA (and Mr. Cushman in particular) in pushing the HECM Lite product forward in the hope of reducing the size of HECM subsidy or eliminating it altogether. Thank you.

  • The product seems ideal in specific situations. From a subjective evaluation, it does not seem that many who are getting traditional HECM products would prefer HECM Lite. If that evaluation is correct, any significant HECM Lite origination activity could not help but eventually raise endorsement volume.

    As a California originator having a fiduciary responsibility to the borrower, HECM Lite would be a great product to have on board. As to the benefits to FHA, they are enormous. It would mean a lower positive credit subsidy and would also most likely provide additional net MIP to offset any losses incurred from traditional HECM products.

    As to how this new product may reduce the subsidy required for the fiscal year ending September 30, 2011, there are many unanswered questions and issues. The first seems to be just getting over the hurdle that OMB will agree to adjust the subsidy for the HECM Lite. Second is having CBO agree to the results of a revised calculation. Next is if the release of the HECM Lite is not expected until after October 1, 2010, will Congress find the reduction too speculative? Then there is the question of the willingness of Congress to fund either a smaller subsidy if the product cannot be ready before October 1, 2010 but seems highly likely before October 1, 2011, or will it simply require an increase in the reduction to PLFs which can be lowered when HECM Lite comes on line. These issues just skim the surface.

    While all of us would prefer that Congress simply subsidize the HECM program as requested (and we all need to be working for that goal), we genuinely appreciate the efforts of FHA (and Mr. Cushman in particular) in pushing the HECM Lite product forward in the hope of reducing the size of HECM subsidy or eliminating it altogether. To all those involved at FHA, thank you for all of your efforts.

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